The “lame duck” session of the 113th Congress managed to avoid a shutdown of the federal government, but did not accomplish much else. Among the unfinished business left for the new, 114th Congress assembling this month is the Marketplace Fairness Act (MFA).
The MFA would permit states to require out-of-state Internet and mail order sellers to collect sales taxes if such sellers have annual gross revenues of $1,000,000 or more. The MFA would thus establish parity between such large out-of-state, online sellers and in-state sellers which must collect taxes on their sales because of their in-state physical presence.
Passage of the Marketplace Fairness Act is long overdue. It is neither fair nor efficient that a traditional brick-and-mortar store must collect sales taxes while an out-of-state Internet firm can ship the same products into the state without collecting sales tax because such Internet firm lacks an in-state physical location. While Internet and mail order purchasers are legally obligated to pay use taxes on their purchases, in practice, it is difficult for states to collect these taxes. The MFA would establish a level playing field by requiring large out-of-state sellers to collect taxes owed just as their in-state competitors must collect such taxes.
An interesting development during the 113th Congress was the growing recognition by many Republican lawmakers that the MFA implements conservative values. In the past, Internet firms have denounced the MFA as imposing a “new” tax, a label that is poison in the current political environment. However, as Rep. Steve Womack of Arkansas has recently observed, the status quo permits Internet shoppers “knowingly and willfully” to flout their obligation to pay use tax when Internet sellers do not collect such tax. Such disregard for legal duties, he states, “has never, never been a conservative value.”
Another important development has been the growing recognition by free market advocates that the status quo effectively constitutes heavy-handed industrial policy as the government effectively hobbles brick-and-mortar retailers in their competition with Internet sellers who do not collect sales tax.
A third interesting development has been the convergence of the business models of many Internet sellers and traditional retailers. Internet firms, most prominently Amazon, have sprouted local distribution centers to provide same day (sometimes one hour) delivery of products ordered online. In those states where Amazon builds distribution centers, Amazon must collect sales tax because of its in-state physical presence.
To compete with same day delivery, some traditional retailers are experimenting with Internet ordering. Under these experiments, customers purchase online with traditional retailers and then pick-up their goods that day at the store or have their goods shipped to them that day from a traditional brick-and-mortar location. Thus, the once bright line is blurring between traditional retailers required to collect sales tax and Internet sellers which need not collect tax because they lack in-state physical presence.
As Amazon and other electronic sellers collect sales tax in additional states, it is all the more anomalous for other Internet and mail order companies to refuse to collect such tax because they lack in-state physical presence.
The Marketplace Fairness Act would excuse from the duty to collect sales tax truly small Internet sellers, defined as those firms selling less than $1,000,000 annually over the Internet or by mail order. The only compelling objection to the MFA is that, if the MFA became law, a single dollar sale into a particular state would compel a covered seller to collect that state’s sales tax.
Infrequent and casual sales into any particular state should not trigger the obligation to collect that state’s sales tax. Hence, Congress should amend the MFA to require that an Internet seller need not collect the taxes of any particular state until that seller’s sales have have met some minimum threshold in that state. I would recommend that an Internet (or mail order) seller with $1,000,000 in aggregate sales be required to collect taxes for each state into which it sells $10,000 or more in any year.
So amended, the 114th Congress should enact the Marketplace Fairness Act.
Headline image credit: © hjalmeida via iStock.
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By Edward Zelinsky
As they scramble for tax revenue in a challenging environment, the states increasingly turn to so-called “Amazon” laws to force out-of-state internet and mail order retailers to collect tax on their sales. The Illinois General Assembly is the most recent state legislature to pass an Amazon statute. New York, Colorado, Rhode Island, North Carolina and Oklahoma have already enacted such laws while Amazon acts are pending in other state legislatures.
While they differ in important respects, all of these proposed and enacted laws share the premise that goods which are taxed when purchased in a conventional, bricks-and-mortar store should also be taxed when bought from an online or mail order retailer. This premise is compelling.
It is neither fair nor efficient for a sales tax to discriminate between close economic substitutes, taxing one but not the other. A sales tax should not tax green apples while exempting red apples. Such discrimination is inequitable to growers of green apples and distorts consumer choice by artificially increasing the after-tax price of green apples relative to the competing (and tax-free) product, i.e., red apples.
This is in essence the sales tax status quo under the U.S. Supreme Court’s decision in Quill Corp. v. North Dakota. Quill held that, under the U.S. Constitution’s dormant Commerce Clause, a state can require a retailer to collect and remit tax on its sales only if the retailer is physically present in the taxing state. Under this rule, firms like Amazon, Overstock.com and similar mail order firms need not collect tax on their sales since they lack physical presence in most states.
As a matter of law, when an electronic or mail order retailer does not withhold tax, the buyer of online or mail order merchandise is required to self-assess and pay the tax to his home state. In practice, it is virtually impossible for the states to enforce this obligation. Goods ordered over the internet or by mail order are thus effectively tax-free while the same goods are subject to sales tax when purchased in a conventional store physically present in the taxing state.
This de facto tax discrimination between conventional and electronic sales is no more fair or efficient than a sales tax which taxes green apples but not red apples.
The states (supported by bricks-and-mortar retailers) have asked Congress for federal legislation permitting the states to require out-of-state retailers to collect taxes on their electronic and mail order sales, even if such retailers lack in-state physical presence. So far, Amazon and its allies have successfully lobbied Congress to resist the states’ pleas.
Frustrated by Congress’ inaction, state Amazon laws are a form of self-help, designed to require out-of-state retailers to collect state taxes on their sales despite Quill. The Amazon laws of New York, North Carolina and Rhode Island create statutory presumptions that in-state affiliates create sales tax jurisdiction over the out-of-state internet firms with which such affiliates are associated. Taking a different approach, Colorado’s Amazon law requires internet retailers to report their Colorado sales both to the Colorado purchasers and to the Colorado Department of Revenue.
For two reasons, these state Amazon laws are neither a practical nor a legal solution to the problem of untaxed internet and mail order sales. Laws like Colorado’s, which require reporting by out-of-state firms, are unconstitutional under Quill, as the U.S. District Court for the District of Colorado recently held. Laws like those of New York, Rhode Island and North Caroli
Hey everyone! It's Maddy again!! Today was a pretty action-packed day. A lot of stuff was filmed on the set and I sat through it all (except I slept in a trailer for a little bit because the jet lag was catching up to me). Guillermo took his personal assistant Russell, Dad, and I out for ice cream so we didn’t end up eating the not so tasty lunch they have on set!! (That’s a good thing.) None of us had any real lunch actually but that’s okay because GDT (I’ve noticed that that’s one of his nicknames ‘round here) claims that ice cream is a food groupl. It was kind of funny because while we were eating my father dearest said I should put the whole ice cream thing on this blog, and then Guillermo insisted that we go back and try the lemon sorbet because then I’d really have something to blog about. It was delicious by the way. ☺ I met more of the cast members today including Doug Jones who plays Abe. He is very nice but his costume is kind of smelly. I think it’s the leather. Oh, and I have some simply brilliant news!! Selma Blair thinks I’m cute, Claire Danes thinks I’m funny, Doug Jones thinks I’m gorgeous, and Guillermo del Toro thinks I should eat more ice cream. Pretty mind-blowing, I know! Anyway… today’s picture is one that my dad took of me with his phone when I was standing there unaware. (That rhymes. I’m a poet and I didn’t even know it.)
Apparently my padre is learning a lot about directing from Mr. del Toro and I think that he is also helping with the dialogue in the script. Oh Madeleine, Oh Madeleine how lovely are your branches… tee hee, sorry that is in my head. I replaced the words Christmas and Tree with Madeleine though because I think it gives it a nice little jingle. Plus Madeleine is my first name. Anyhoo, we won’t be going back to the studio until Monday, but on Sunday we are going to see Tori Amos who just happens to be here the same time we are. Also Selma’s birthday is tomorrow so today they had cake for her at the end of the day. It was very appetizing. Someone gave me bubbles to blow when the cake came out and everyone was going to blow kazoos and stuff, so I set the bubbles on my chair but when I came back they were gone. Tear. Ah, well it was still fun. Dad also took a really good picture of me and Selma but I’m not allowed to put it on here for reasons I am not allowed to mention on here but don’t get curious because it’s nothing big. Also curiosity killed the cat. Alrighty, well I best be finishing up! I’m not promising that there will be an entry tomorrow but we shall see. Fare thee well!
